Barber’s Wire: Silver Fern receives an offer it can’t refuse

No wonder the deal between Silver Fern Farms (SFF) and Shanghai Maling took so long to conclude, but from all appearances it was worth waiting for. Not that you would necessarily think so, if you read about the disappointment of some shareholders and the Meat Industry Excellence (MIE) group about the board’s unwillingness to give serious consideration to an alternative farmer offer of $40 million or some of the business commentary, writes Allan Barber.

Going back several years, SFF wanted $120 million from its shareholders, hoped for $80 million and actually received $22 million. Nothing has really changed since then – good and bad years have followed each other, as livestock numbers and market prices fluctuated and the business struggled under a huge debt burden.

Farmers have had the opportunity for years to stump up capital, but realistically this was a forlorn hope when dollar shares quite quickly declined to well under 40 cents. It is amazing anybody, even the most incorrigible optimist, would expect farmers to pursue such an investment strategy purely and simply out of misguided loyalty to the principle of cooperative ownership.

Apart from the warm and fuzzy feeling of being a member and part owner of ‘your’ company, there isn’t a lot to recommend a member supply-based as distinct from purchase-based cooperative in these days of consumer power. A study by Auckland research company Coriolis into the Chinese infant formula market found New Zealand farmers and processors contributed 40 percent of the asset value to the value chain, but only captured 12 percent of the profits. This is the unpalatable truth about commodity markets.

Cooperatives are not necessarily any worse than other ownership structures for capturing value, but the cost of developing added value is usually better carried by a business which doesn’t have to keep thousands of shareholders happy. Fonterra’s supporters may argue differently, but it is entirely possible the company would be more successful if it wasn’t constrained by the need to maximise the milk payout to shareholders.

SFF has apparently secured the best of both worlds, cooperative and corporate, with the injection of $261 million of new equity and the formation of a JV partnership to promote the branded ‘plate to pasture’ business model which the company has been struggling to develop on its own.

Some commentators are convinced this allows the Chinese Trojan Horse (if that’s not a contradiction in terms) to enter the New Zealand food and red meat sector with the inevitable outcome that it will culminate in further processing being transferred to the lower wage economy in China and New Zealand farmers will remain peasants in their own land. In the short term there will be a period of prosperity for farmers while Chinese dominated Silver Fern Farms pays over the odds for livestock in order to drive competitors into the ground.

I have a couple of questions to ask about the perspective of these commentators, because I’m not convinced it is actually realistic.

The first question is why this deal should be any different in theory from Japanese majority ownership of ANZCO or Taiwanese ownership of Universal Beef Packers; the second question is whether the extra margin would all flow back to the farmers as a result of ownership of more of the value chain. My third question is whether Shanghai Maling’s statement of its intent to act strictly as a 50/50 partner in the management and governance of SFF is believable or not.

I am not convinced Shanghai Maling are any less trustworthy than other existing overseas investors or intend to revert to the bad old days of Vesteys and Borthwicks when New Zealand had genuine freezing works without the ability to add value. Equally, it is very doubtful that ownership of the value-chain would result in higher margins being paid to farmers, unless they are prepared to invest serious money in controlling that value chain. In response to the third point, it is up to the SFF Cooperative directors and shareholder suppliers to ensure the continued desire of the Chinese partner to act like a genuine partner. The ability to withhold livestock supply is a powerful weapon.

Shanghai Maling proposes to invest a large sum of money in the company and appears genuine in its desire to build the business of SFF in cooperation with its partners. It is perfectly possible to be cynical about the longer-term intentions but, in the meantime, the debt laded cooperative doesn’t have many if any other options.

The mood of shareholders to the proposal seems to be generally favourable, although there are still groups and individuals who are unhappy about this loss of control. Assuming the vote is positive, I believe this deal will be good for New Zealand and the meat industry and can’t see how the Overseas Investment Office (OIO) or responsible Ministers could possibly turn it down.

If they did reject it, our free trade agreement with China might not be worth the paper it’s written on and the prospects for rescuing our largest meat company would take a major hit to the detriment of shareholders and staff.

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